Traditional mortgages require that you make monthly payments on both the principal and the interest on the money you borrowed. The principal you owe on your mortgage decreases over the term of the loan. An I-O payment plan allows you to pay only the interest for a specified number of years. After that, you repay both the principal and the interest.
Most mortgages that offer an I-O payment plan have adjustable interest rates, which means that the interest rate and monthly payment will change over the term of the loan. The changes may be as often as once a month or as seldom as every 3 to 5 years, depending on the terms of your loan. More information on ARMs is available in the Federal Reserve Board's Consumer Handbook on Adjustable Rate Mortgages.
The I-O payment period is typically for 3 to 10 years. After that, your monthly payment will increase, even if interest rates stay the same, because you must pay back the principal as well as the interest. For example, if you take out a 30-year mortgage loan with a 5-year I-O payment period, you can pay only interest for 5 years and then both principal and interest over the next 25 years.
